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Lesson Note

Subject: Economics
Topic: Basic Economic Problem of the Society.

Lesson Objectives: by the end of the lesson the learners should be able to;
1. Identify and explain the economic problems of the society;

2. State the factors which determine each of the problems.

Lesson Summary Aids: See reference materials below content.

Lesson Summary / Discussion

Basic Economic Problems of The Society


In lesson one, we discussed some issues on scarcity, choice, and opportunity cost. There, it was stated that the resources available to a consumer is limited but wants are unlimited, and therefore the issue of choice and forgone alternatives came in when individuals makes decisions. This situation is not limited to an individual, firms and governments.

A firm could be seen as a technical unit which uses inputs (resources such as land, raw materials, etc) to produce outputs (such as shoes, clothes, books, food etc.).

Because firms are constrained by unavailability of resources which include fund, it must make decisions on what to produce. After it has taken such a decision, it must go on further to determine how “best” to produce such a commodity and for whom to produce. In other words, the input-output relationship involves a lot of decisions to achieve.

The government sometimes engages in production/provision of goods and services. It would have to also make decision on what to produce, how to produce it and for whom to produce. The decisions taken by firms and government have implications. Therefore, the question of what to produce, how to produce, and for whom to produce are regarded as basic economic problems or sometimes referred to “fundamental ” issues in economics. We will look at these questions one after the other but first, let’s look at the meaning of the concept basic economic problem.

Basic economic problems refer to the problems people encounter in the society while attempting to satisfy their numerous wants with the limited resources available to the. These Basic economic problems of society include what to produce, how to produce, for whom to produce and efficient use of resources.

Basic Economic Economic Problems Of society include;

1. What to produce

This is borne out of the limited wants due to limited resources. Determining what to produce, therefore, heavily depends on the multiple demands of people and the readiness of producers to satisfy these demand.

Factors Which Determine What to Produce

Consumers Needs: The producers will have to consider the needs of the consumers. They have to decide what goods and services required by the consumers

Market Demand: In economics, the principal variable which signals what to produce is the price which such a commodity commands in the market. Commodity with positive price (price above zero) tend to be produced. For a commodity to be produced, it must therefore possess an effective demand. Take for example, a firm situated in the Sahara Desert decides to produce sand, it would discover that the price governed by the effective demand for sand is almost zero if not even zero. In such a case, a rational producer will not engage in sand production in the Sahara Desert. Another example is a producer who wishes to set up a piggery to produce pork in an essentially Islamic country like Iran or Saudi Arabia. The effective demand is almost nil and so is the price. Price therefore represents a strong indicator of what to produce. From the last example, it would be discovered that not only price affects the decision on what to produce, certain sociocultural and religious factors also affect what to produce. Legislation: This could legally prevent the production of some commodities such as hard drugs, fire arms etc even though they command positive and higher prices.

Availability of Resources: Availability of resources also play a vital role in such a decision. For example, an investor with N1 million to invest would neither think of establishing a ship-building yard nor locomotive production. These ventures are capital intensive and the absence of fund may rule out their production. Sometimes, the fund may be available but the appropriate technology is just not present and importation or purchase of foreign technology may prove expensive and illogical. In such a case, a commodity will not be produced if the required technology is absent and could not be readily and cheaply acquired. Example is the generation of electricity using nuclear powered turbines in less developed countries. The fund is not just there and where such a fund is present, the technology is absent.

Consumer Income: In deciding what to produce, the producers normally take into considerations the earnings of consumers in the society. Producers normally ask themselves this question: Are the consumers b earning enough income to be able to purchase the goods and services at a given price when produced? If yes, they go ahead but if no, they may not produce.

Type of Economy: the type of economic system in a given society determines the type and quantity of goods and services to be produced. For example, in a capitalist economy, the price system determines the type and quantity of goods and services that are to be produced as profit is the major determinant of what to produce whereas in a socialist economy, the state controls and direct the allocation of resources. Hence it decides what to produce with the sole aim of satisfying the wants of the citizens of society or state.

Therefore, the decision of what to produce requires both economic and non-economic considerations such as technical, social, cultural, legislative, and religious considerations. But in the strict economic sense, price remains a cardinal factor in the choice of the commodity to produce.

2. How To Produce

Even after the question of what to produce have been solved, the question of how to produce it still arises. This could even be seen as a more crucial question because certain non-economic factors as ideology come openly into play.

Factors Which Determine How To Produce

Technique of Prodiction: Starting at the technical level, it is usually the case that the production of a given quantity of output could be produced in different ways usually called ‘processes’ in economic jargon. Choice of technique now comes in. But a basic rule in economics is that, that process will be used if it can produce a given quantity of output at the lowest possible cost. In other words, a process will be used or chosen if it produces a given output using the least amount of input. In such a case, the process is said to be superior to other processes. Choice of technique could be said to be essentially a technical question, but in making a choice, economic considerations must come in. A process which yield the highest return will be picked, at least, theoretically.

Technological Advancement: The method of production adopted by an individual, firm, or state depends on the level of technological development of the state. Developing countries usually adopt labour intensive mode of production while developed countries adopt capital intensive mode of production.

Production Function: This involves any analysis which shows the possible quantity of goods by using each of the given alternative combination of resources that produces the largest quantity of output at the lowest unit of cost of production. A favourable production function will ensure large production of goods to meet the demands of the customers.

Relative Cost Of Factors Of Production: The cheaper the relative cost of factors of production, such as labour, capita, land, etc, the more the production of goods and services to satisfy human wants but when the factors of production is high, very little production will be attained.

3. For Whom To Produce

Before engaging in production, investors are expected to have carried out a feasibility study about the nature of the business. One of those things you do in the study is to identify prospective consumers of the commodity to be produced. Investors try to ascertain if the demand of such prospective buyers is enough to guarantee the firm some reasonable level of returns. If not, the investors turn to other goods which will yield an appropriate level of return. Instances however exist in which investors (in this case, the government) would produce and provide services to a certain category of people even where such a measure is done at a loss. There are general reasons why the government does that. Among them are attempts to reduce income gap among citizens, to provide services to all even where some people cannot afford it. It must be understood that the decision to produce for a particular group of people by the private investor is essentially a function of the purchasing power of such a group. The group that can register the highest price signal to the market tend to be more favoured in production. This is a major reason why luxury goods are usually being produced by private investors and necessities are usually produced by the government. Therefore, for whom to produce is also a function of who is producing the good, the nature of the good in terms of the level of rivalry in consumption and level of joint supply. Public goods tend to be available to all while private goods have marker restrictions. Basic needs which are necessities such as health, education, electricity and water supply need not be denied anybody and so the state must make sure they are available to all at least. However, this is not the same with private investor in which the level of income essentially determines for whom to produce.

Factors Which Determine For Whom To Produce

The following factors must be considered when determining who to produce:

Satisfaction of Wants: All the goods and services produced either by individuals, firms or government must satisfy the needs or wants of the society.

Level of Income: The higher the level of income of the consumers, the more they are able to buy goods and services produced. But if the level of income is low, the purchasing power will equally be low and this will lower the rate of production of these goods and services.

Type of Economic System: In the capitalist and mixed economies, who gets what depends on the priced of the various products and amount available to each individual, but in a socialist economy, the state normally introduces a quota system in the distribution of goods and services among the people.

4. Efficiency Of Resources Use

In production, efficiency of resources used refers to the optimum use or combination of factors of production to achieve higher and better output at a reasonable cost. Since the resources available in the society are limited relative to demand for them, it becomes a wise decision to ensure that these limited resources are efficiently used to produce the desired goods and services. And so one of the basic assumptions in economics about economic agents such as consumers and producers is that decisions are based on rationality. The assumption of rationality entails that there exist consistency in decisions and actions. Economic agents would always prefer a superior alternative to an inferior one. Rationality therefore ensures that in production of commodities deferent processes of production are evaluated and the best will be selected and used in production processes gives a certain level of output. Producers will chose that which uses less input over the other.

Efficiency is essentially a technical relationship in production. Efficiency of resource use in production therefore ensures that the given level of output is achieved using the least possible cost/input. Take for example, to produce a unit of shoe, a process requires 2 units of labour and 4 units of capital and an alternative process require the use of 1 unit of labour combined with 1 unit of capital. Given equal resources cost for both processes, a rational production will choose the later process if production is to be carried out efficiently. There are instances where more than one efficient process are available in production, the choice of an efficient process in such a case becomes an economic decision. That is, which of the available efficient yield the least cost. It should be realised that efficiency in resource use is not limited to producers alone. The allocation of resource (e.g income) by consumers among alternative and competing needs entails taking rational decisions so as to achieve efficiency in consumption. Rational economic decision entails that the consumer allocate his resource (e.g income) among commodities in such a manner that the satisfaction derived from spending an additional unit of income is the same for all commodities. At such a point, consumption efficiency is achieved. Efficiency in resource use therefore occurs both in production and consumption.

Factors Which Determine Efficiency of Resource Use

Quality Of Labour: Skilled labour, unlike the unskilled labour used in production, could contribute to efficient and effective use and allocation of resources in production, reduction of was tag, savings in time and consequently an increase in the quantity and quality of output.

Techniques Of Production: The use of capital intensive mode of production, which involves the use of machines and equipment, may produce more goods, save time, reduce wastage and consequently reduced the use of labour intensive method, which may waste time, produce less and increase wastage.

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